Sole Remedy Clauses: Practical Tips for Italian Transactions

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1. SOLE REMEDY CLAUSES: ENFORCEABLE OR NOT?

While rather common in practice, “sole remedy clauses” (or “exclusive remedy clauses”) are not expressly regulated in Italian statutes, and court precedents do not provide clear guidelines either.

Nevertheless, we believe that a sole remedy clause may be validly included in an agreement, and be enforceable, provided some drafting tips are followed and certain conditions are met.

2. PURPOSE, STRUCTURE, AND CONTENT OF THE SOLE REMEDY CLAUSE

Sole remedy clauses are commonly included in M&A agreements. The main goal is to give certainty and predictability to the risks assumed by the parties by limiting the applicability of remedies set by laws in the event of a breach of contract.

M&A agreements usually include indemnification provisions and rules pursuant to which a party agrees to hold harmless and indemnify the other from specific claims (e.g., “losses” arising out from the breach by the seller of the representations and warranties granted to the buyer). Indemnification provisions may, and often do, apply to both seller and buyer; however, the indemnification obligations of a seller are much more relevant, in that they are intended to cover the entire apparatus of representations and warranties, which often represents the core of the agreement, and the most likely source of post-closing disputes. In most cases, these indemnification rules are qualified as “exclusive remedy”, thus meaning that the indemnification rights provided for in the purchase agreement are the only post-closing relief available to either party in case of breach of contract or, most often in the case of a seller’s indemnification, a misrepresentation.

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